Are silver prices about to shine?

With all the fuss about central bankers and their printing presses it seems most of the focus in recent months has been on the gold price and how the decision to buy gold bullion can protect you from the debasement of fiat money.

However, the price of silver has been enjoying its own little rise to the top.

What are silver prices up to?

In the last 4 years, silver has climbed 211%, 20% in this year alone. Gold prices, in comparison have climbed just over 108%.

The highest point silver has reached was $49.77, on 24th April 2011. Prior to this, to see the precious metal hit the $20/oz level was something which many felt was unjustified, prompting calls of a bubble. This month spot silver is currently averaging $33.37/oz.

In the last year investors have, so far, purchased in excess of 32 million ounces through silver-backed exchange-traded products this year.

Did silver hit its peak 18 months ago so are we about to start seeing it make a break for new highs?

In mid-May David Morgan, the Silver Guru, called the bottom in both mining shares and bullion. Aside from his own indicators, he was also drawn to calling it thanks to extremely low sentiment and short covering in the market – when the volume is extremely high but there is no real buying pressure.

‘Short covering at a bottom is a good indicator that the smart money or the professional money is moving out of the market. In other words, they shorted for a very long time. They made their money, they’re getting out and they are covering their positions.’

Morgan now sees silver going above $35/oz, if not $40/oz by the end of the year, thanks to the ‘fear trade’ which reflects the ever more precarious position the world economy finds itself.

The silver price in a bubble?

Silver is a precious metal which is not only desired, as gold is, but it is also needed as it is an industrial metal. This means that the supply of silver is more at risk than gold.

In a strong economy, industrial demand will remain high, pushing prices high as mining deficits grow. In a weak economy, not only do producers slow production which limits supply, but silver becomes a hedge against monetary collapse, mirroring gold’s moves which traditionally rise.

In the short-term silver’s price seem can be relatively inelastic compared to other commodities, particularly gold, as it is used in a range of industries. In 2011, industrial applications accounted for over half of the world fabrication demand. This, combined with short term price inelasticity has helped to quote strong price support. Remember the price inelasticity is due to the tiny amounts, and thus miniscule value of the silver usage compared to finished industrial product. Ie – $5 of silver used in a $200 fridge, if silver goes up 1000%, silver cost in fridge production still only $25.

Silver, unlike gold, has experienced some fairly dramatic changes in its use over the last one hundred years or so. The 19th Century’s photography demand withering has changed the face of demand for silver. Whilst digital photography has put a dampener on this demand for silver, new and innovative technological developments are creating a plethora of new uses for the most useful of white metals.

Whilst the economy malaise might dampen some industrial demand it will drive innovations to be more efficient and so far more technological and medical advancements may well be made, and in doing so will boost industrial demand for silver.

However analysts believe that the current drive behind the price rally at present, is strong demand from investors who are bullish on further central bank action. They are viewing silver, like gold as a store of value and safe haven.

In Ted Butler’s latest commentary he states that he believes the current silver to gold ratio, which currently stands above 50:1 will not be able to continue, having done so for a number or years. This is partly thanks to the relatively far small amount of bullion outstanding for investment. But it is also thanks to the fact that silver, when used in industry, is often consumed in its entirety (rather than recycled) and therefore. This is, of course, entirely different to gold, of which the majority ever mined still exists. Therefore the potential for silver to achieve considerable gains is extremely likely.

The volatility of silver can be both a turn-on and turn-off for investors. When gold is enjoying a rally, silver rises faster and therefore offers greater returns. For instance, in the last four weeks or so, gold has gained 9%, whereas silver has gained 23%. But, as we all know, silver is like gold on steroids, so the reverse can be true as gold drops in price.

Silver seems to face an unending battle for gaining respect as something more than just a commodity. It is typically believed to be worth much less than it is going for – i.e. what the demand would imply.

However, as currencies continued to be debased and countries continue to release further policies which delay the inevitable financial collapse, silver will shine as a hedge against dangers in the financial system.

So there you go, silver is handy in industry, it follows gold like a loyal lapdog and it is also a historically recognised form of money. Beyond gold, silver can also be a safe haven devoid of counterparty risk in uncertain times such as these.

As we write this silver has just broken through $35. Maybe the bull market is about to get a bit hotter?

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

Enjoy our comment? Get it all delivered to you in our fortnightly newsletter.

About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles